International Airlines Group (IAG) has revealed that its canceled takeover of Air Europa is set to cost €75 million ($85 million). The takeover deal, arranged before the COVID pandemic, had met some regulatory problems before today's announcement. IAG will now pay Globalia an additional €35 million ($40 million) on top of a previously-agreed sum of €40 million ($45 million).

IAG shells out after Air Europa deal collapse

In November 2019, IAG agreed on a €1 billion ($1.13 billion) deal to take over leisure carrier Air Europa. In January 2021, the price of the deal was dropped to €500 million ($567 million) due to the impact of the COVID pandemic.

Simple Flying reported yesterday on advanced talks between IAG and Globalia to void the Air Europa deal. IAG has announced that the entire takeover deal has been scrapped and will pay Globalia a €75 million ($85 million) break fee.

It has been more than two years since IAG announced its plans to purchase Air Europa. Photo: Getty Images

Luis Gallego, IAG's chief executive, said,

"It is very disappointing that we have had to terminate the current agreement to acquire Air Europa but the decision makes sense due to the market conditions, the deep crisis resulting from COVID-19 and taking into account our desire to maintain a disciplined approach to capital allocation."

The deal may not be completely dead in the water just yet. Interestingly, IAG noted that the €75 million payout will "be applied to reduce any future purchase price if a new agreement is reached and to avoid any litigation relating to the acquisition."

Gallego added,

"We have committed to analyse alternative arrangements with Globalia that could deliver significant benefits. In the same way, we will continue to work with the Spanish Government to guarantee the connectivity of Spain and the development of the Madrid hub.

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Deal falls foul of European regulators

The European Commission launched an investigation into the Air Europa takeover in June amid concerns that it would grant too much power to IAG in Spain. Regulators believed the takeover could harm both domestic and international competition, as IAG already owns Spanish carriers Iberia and Vueling.

Air Europa
The takeover deal was subject to intense regulatory scrutiny. Photo: Air Europa

Additionally, the IAG-Air Europa deal was at risk of an in-depth investigation by the UK's Competition and Markets Authority. The watchdog was set to decide on January 19th whether to escalate the case to a phase two inquiry. Regulators are believed to have made clear that the takeover would not go ahead without further concessions.

IAG shares take a hit

IAG's takeover of Air Europa was part of a larger strategy to establish Madrid-Barajas Airport as a leading European hub, on a par with airports like Amsterdam Schiphol and London Heathrow. IAG was particularly keen on taking over Air Europa's Latin America connections.

IAG's plans to transform Madrid-Barajas Airport have hit the rocks. Photo: Getty Images

However, with the deal now formally canceled, IAG shares dropped by 2.5% today. Since the outbreak of the Omicron variant in late November, IAG shares have gone from 180p down to 130p.

What do you think of the IAG-Air Europa takeover cancellation? Do you believe IAG will resurrect the deal in the future? Feel free to share your thoughts in the comments.